Eq: Total Market
The market is seeing some of the highest volatility since the pandemic and before that, you have to go back to the taper tantrum, but how should investors respond? While the most obvious answer is to ‘buy the dip’, the question remains where. Investors should look to industries whose fundamentals haven’t shifted in the most recent months or are less susceptible to the ongoing volatility shifts. This value tilt means leaning towards financials and commodities. Moreover, investors should steer clear of those exactly susceptible to current volatility spikes. Technology and emerging markets are easy stay-aways because inflationary pressures are going to hurt growth stocks and supply constraints will bottle up developing economies for the foreseeable future.
Finsum: More advanced hedging strategies should be considered in equity markets given the volatility, but still tilt toward value.
Volatility ETFs reached infamy in the 2018 Volmageddon episode, but these formerly destructive ETFs making a Lazzarath-like comeback. Both the SVIX and UVIX delivered record style gains amid inflows due to market gyrations UVIX closed 37% higher but was up 42% in mid-day trading. The wild up and downs came in response to the Fed meeting and a tanking S&P the following day. Advisors are steering investors toward both UVIX and SVIX because this is exactly where these products thrive. However, there is still a substantial risk as investors have suffered greatly in the past from these products and the ‘juice’ they are receiving could be detrimental on the downside.
Finsum: This is unprecedented volatility in the post-GFC, and it could continue until inflation is under control.
Model portfolios are a great tool to increase flexibility, growth, and optimization, and Principal is launching almost 40 new products in response to demand. Jill Brown, director of their U.S. Wealth Platform says they will give solutions that are easy to manage and deliver results to clients. These portfolios will leverage the full power of their fintech platform to help advisors hit their goals. The end products will include mutual funds and ETFs and will allow clients to personalize their portfolios with different risk-based suites. Capital appreciation will be the main goal of the three of the core suites, while total returns will be the main goal of the last suite.
Finsum: Third-party model portfolios give tailored solutions, and make customization easier than ever.
Goldman Sachs put out its views on the market’s volatility and how to handle it. The bank is not bullish on markets but thinks there are some very good stocks to help weather the storm. Unsurprisingly, Goldman says investors should buy stable stocks to help get through the turbulence, as such hum-drum stocks look like they have room to run. "Stable stocks also trade with undemanding valuations, supporting the likelihood that they will outperform if the macro environment grows increasingly challenging. Stocks with stable share prices and stable earnings growth generally trade with a valuation premium relative to more volatile peers and to the typical S&P 500 stock. However, relative valuations today are much lower than they have generally been during the last few years."
FINSUM: This is essentially a low-vol, value play, and that makes perfect sense right now. Very stable companies are likely to get through the economic upheaval better than their peers, so on a relative basis they should outperform.
Goldman Sachs released their latest economic forecast and predict the U.S. will grow at its second-highest rate in over 15 years. The 3.1% prediction would only be outpaced by the K-shaped recovery in 2021. Moreover, they said there is a lower risk of a recession in the next year than the rest of Wall Street with about a 15% chance. Attributing much of the inflation to supply chain issues, Goldman seems to be leaning on the latest core PCE inflation numbers that the Fed cares most about which were on the decline. The biggest ongoing risks to the world economy are China and the continuing Russia-Ukraine war.
Finsum: Goldman believes the Fed can thread the needle and hit the soft landing that many say is impossible, time will tell if they can.
MSCI Inc. has come out firing against the hedge funds' strategy in dealing with ESG. Many prominent hedge funds, like AQR, have not only invested in ESG but are shorting poor ESG scoring companies in an attempt to raise the cost of capital. MSCI VP of ESG, Rumi Mahmood, says this is not an effective ESG strategy because it decreases transparency and doesn’t align corporate and investor interests. On top of that, he believes shorting poor ESG metrics won’t affect the cost of capital for these companies. MSCI finds that engagement over time is the alternative and better pathway to influence a company's behavior.
Finsum: There is not enough evidence out there as to the effect of short selling on capital formation, however, companies shorting traditional energy have taken a bath.